Constitutionality of Bank Negara Malaysia’s Shariah Council’s Rulings on issues affecting Islamic financial transactions

The Edge Court Judgement Report (20.9.2019)

ISLAMIC BANKING AND DISPUTE RESOLUTION

CONSTITUTIONALITY of Bank Negara’s Shariah Council’s Rulings on issues affecting Islamic financial transactions

Sections 56 and 57 of the Central Bank of Malaysia Act 2009 (‘BNM Act’) require the Court and an arbitrator to refer a Shariah issue which has arisen in legal proceedings relating to Islamic financial business to the Shariah Advisory Council (‘SAC’) of Bank Negara Malaysia (‘BNM’) for a ruling. The ruling of the SAC is binding on the Court and the arbitrator.

Issue

The fundamental issue is whether Sections 56 and 57 of the BNM Act are unconstitutional for taking away the power of the judiciary to deliberate and decide on an issue in a dispute in Court by vesting the resolution of that issue with the SAC. This question confronted the Federal Court in JRI Resources Sdn Bhd v Kuwait Finance House Bhd. The serious importance raised by this issue in financial transactions based on Islamic principles inspired the Federal Court, for the first time in history, to convene a nine-judge panel, to deliberate upon the issue. Apart from the original parties involved in the litigation, BNM and the Association of Islamic Banking Institution of Malaysia (‘AIBIM’) intervened and actively participated in this case. BNM, AIBIM and the respondent, Kuwait Finance House Bhd (‘KFH’) defended the constitutionality of the statutory provisions.

Summary sketch of the facts

KFH had provided JRI Resources Sdn Bhd (‘JRI’) with an Islamic financing facility under the principle of ijarah (leasing) to fund the acquisition of vessels. In essence, KFH purchased the vessels from a third party at the request of JRI and KHF became the owner of the vessels. The vessels were then leased to JRI. Subsequently, KFH sued JRI in Court for outstanding lease payments.

JRI’s defence was that the vessels had failed to generate income due to KFH’s failure to carry out major maintenance works on the vessels. This, JRI claimed, was the responsibility of KFH as the owner of the vessels. KFH, on the other hand, claimed that pursuant to a clause in the Ijarah Facility Agreement (‘Relevant Clause’), it was JRI’s responsibility to undertake all major maintenance works in respect of the vessels. JRI argued that the Relevant Clause was against Islamic law and appointed a Shariah scholar, Dr. Azman Mohd Noor, to act as an expert witness in the Court proceedings. Dr. Azman’s expert opinion was that the Relevant Clause was not in compliance with Islamic law. KFH also provided expert evidence through its Shariah scholar, Dr. Aznan Hasan. Dr. Aznan agreed that the Relevant Clause was non-compliant with Islamic law but took the view that the non-compliance was immaterial and did not result in any invalidity. A Shariah question on the validity of the Relevant Clause from the Shariah perspective was therefore raised in the proceedings. The High Court referred the issue to the SAC under Sections 56 and 57 of the BNM Act. The SAC ruled in favour of KFH. The ruling was thus binding on the High Court, which then scheduled the case for trial.

Before the trial started, JRI applied to refer to the Federal Court for a determination on the constitutionality of Sections 56 and 57 under which the SAC had given its ruling. The nine-judge panel of the Federal Court was sharply divided in its decision with a five to four majority in favour of the constitutionality of the provisions.

Decision of the majority

The leading judgment of the majority was written by Justice Mohd Zawawi Salleh (Azahar Mohamed, Ahmad Maarop, Ramly Ali and Alizatul Khair Osman Khairuddin FCJJ concurring).

Justice Mohd Zawawi Salleh referred to Section 52 of the BNM Act, which sets out the functions of the SAC, one of which is to ‘ascertain the Islamic law on any financial matter and issue a ruling upon a reference made to it’. Accordingly, the learned Judge held that the SAC only ascertains the Shariah rules that may be in dispute between the parties and the SAC does not determine the ultimate outcome of the litigation and which rests with the Court. As such, the exercise by SAC of its power under ss 56 and 57, including the binding effect of its ruling on the Court, does not involve an exercise of judicial power and does not usurp any power of the judiciary.

Justice Azahar Mohamed (now, CJM) agreed, holding that the ascertainment of Islamic laws are a function or power delegated to the judicial branch and the SAC. In the words of the learned Judge, ‘the impugned provisions could not and did not trespass or intrude onto the judicial power; the provisions did not violate the doctrine of separation of powers’. The majority also justified the impugned provisions by drawing a comparison to the mandatory sentencing regime of the criminal law where it is the Parliament, not the Court, that fixes the punishment on a convicted person. Similarly, it was therefore proper for the Parliament to vest the function of ascertaining Islamic law in respect of Islamic banking to the SAC, which arguably is part of the executive, whose decision is binding on the Court.

Critically, the majority drew attention to the diverse opinions amongst Shariah scholars on any particular Shariah issue which had led to uncertainty in the Islamic finance industry. In disputes brought to Court, there had been several decisions where the Judges on one hand had disregarded the Shariah issues and on the other hand referred to the various sources of Islamic law on their own. Thus, it was important that measures be taken to promote consistent implementation of Shariah contractual principles. This is especially because members of the Judiciary are not trained in Shariah.

In upholding the legislation, Justice Zawawi held that the traditional notion of the principle of separation of powers that there are separate and distinct roles for the executive, the legislature and the judiciary has changed over time and that there are overlapping and blending of functions between the branches of the government to facilitate efficient operation of the government. Ultimately, the Federal Court, by a majority judgment, held that Sections 56 and 57 did not provide for the usurpation of the Court’s judicial function by the SAC.

‘… separation of powers of government has never existed in pure form except in political theory. In reality, there is an overlap and blending of functions, resulting in complementary activity by the different branches that makes absolute separation of powers impossible.’

Justice Zawawi Salleh

Decision of the minority

On the other hand,Richard Malanjum CJ (as he then was) wrote one of the dissenting judgments for the minority (David Wong, Zaharah Ibrahim and Idrus Harun FCJJ concurring).

The then CJ anchored his dissenting judgment on the principle of separation of powers between the executive branch of the Government and the Judiciary.

The then CJ accepted that there might be partial overlapping of functions. However, the overlaps have always been found between the legislative and the executive only. There is no overlapping with the Judiciary, which has ‘absolute independence’. Judicial powers cannot be conferred upon any other body which does not comply with the constitutional safeguards conferred upon the Judiciary.

Further, after accepting that judicial power is the power of the sovereign to decide controversies between subjects and between subjects and itself, it was nonetheless held that the resolution of questions of law arising from judicial proceedings is an exercise of judicial power. This, the then CJ observed, is an aspect of adjudication, not ascertainment of principles. The other aspect of adjudication is the resolution of rights and liabilities of parties in dispute.

In context, Sections 56 and 57, the SAC’s functions intrude in the midst of ongoing judicial proceedings. The intrusions involve determinations affecting rights and liabilities of parties who are before the Court and are not mere general pronouncements on policies applicable for the future. The SAC’s ruling cannot be challenged with any contrary expert evidence, nor reviewed by the High Court nor overturn on appeal. Thus, the rulings of the SAC are not subject to any check and balance mechanism. In this context, it was held that it is immaterial whether the label ascribed to SAC’s function, as held by the majority, is one of ‘ascertainment’ rather than determination. The true nature of the functions can only be discovered upon consideration of the substance and actual effect of the provisions.

Justice Wong Dak Wah CJSS rejected the argument that the impugned provisions ‘do not vest any judicial power on the SAC’, relying particularly on Article 121 of the Federal Constitution that endows judicial power exclusively in the Civil Courts. Although the learned Judge expressed doubt that the test for judicial powers can be simplified into checklist of factors, nonetheless held that applying the three basic elements of ‘adjudication, finality and enforceability’ to test the inherent nature of judicial power, the impugned provisions are unconstituitional. Accordingly, once the SAC had ruled on the Relevant Clause, there is nothing left for decision.

‘… the partial overlap between functions is confined to the spheres of legislative and executive powers … the justification … is to promote efficiency of government … In contrast, questions of judicial power occupy apart under the constitution due to its special nature. The absolute independence of the judiciary is the bulwark of the constitution against encroachment whether by the legislature or by the executive…

Based … on a proper understanding of the principle of separation of powers, [there] are some … basic tenants in relation to judicial powers …(i) judicial power cannot be removed from the judiciary; (ii) … judicial power cannot be conferred upon any other body which does not comply with the constitutional safeguards to ensure its independence; (iii) non-judicial powers cannot be conferred by another branch of the government onto the judiciary …

The legislative purpose behind the enactment of Sections 56 and 57 of the Central Bank of Malaysia Act 2009 is a commendable one … However, good legislative intentions do not excuse a constitutional transgression.’

Richard Malanjum CJ (as he then was)

Islamic banking expected to 40% of Malaysia’s financial sector by 2020

Islamic financial business is at the heart of the Tun Razak Exchange (TRX) project, with some experts calculating that Sharia-compliant transactions could account for up to half of the business that will go through the new centre when it is complete.

Dato’ Azmar Talib, the chief executive of 1 Malaysia Development Berhad (1MDB), the real estate business overseeing the project, says Islamic banking comprises about a quarter of Malaysia’s domestic financial market in terms of assets and financing, but this is expected to reach 40 per cent by 2020, when TRX will be well developed.

“We intend to use Malaysia’s strengths, particularly in Islamic finance, to provide the infrastructure that will enable innovation, attract skilled talents and promote ease of doing business in the sector,” he says.

Others are even more positive about Kuala Lumpur’s potential in the global race to build the leading Islamic financial market. Many analysts believe the competition will come down to a three-way pull between KL, Dubai and London.

Malaysia has longevity on its side, and a developed domestic market. About 60 per cent of primary market sukuk (Islamic bond) issuance was in KL in the first half of this year.

Mohammad Daud Bakar, the chairman of the Sharia Advisory Council of Malaysia’s central bank, says the country has advantages in Islamic finance, such as a developed pensions funds industry, takaful (insurance) and long-term project finance.

“We have established private Islamic ratings agencies that vet the sukuk, and we are the only country with a Sharia-compliant equivalent of the American mortgage firms like Freddie Mae,” Mr Bakar says.

But despite the strength of the domestic industry, Malaysia faces some challenges in the international market. “Around 90 per cent of our issuance is in local currency, so we don’t trade in London. Malaysia has never issued any global sukuk. London uses hard currency, and has deep pockets of dollar reserves, which we do not,” he adds.

“But I believe the UAE will be a leader in this market in the future. It has dollar reserves and will be in a position to take business from London.”

Mr Bakar also points to the potential of the Saudi market. “It is booming because of all the infrastructure that needs to be financed there. It’s a booming market and will probably overtake KL in terms of value of issuance, if not volume,” he says.

(The National / 07 Dec 2013)

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Malaysia: MBSB earnings up on Islamic banking ops, lower impairment losses

PETALING JAYA: Financial institution Malaysia Building Society Bhd (MBSB)made a net profit of RM166.14mil or 13.08 sen per share in the first quarter ended March 31 compared with RM79.41mil or 6.53 sen per share a year ago, underpinned by its Islamic banking operations and lower impairment losses.

The increase was partially set off by higher operating expenses resulting from improved business volume.

MBSB's pre-tax profit surged 114.6% to RM237.11mil from RM110.47mil while revenue rose 48.4% to RM562.47mil from RM378.88mil.

In a statement, president and chief executive officer Datuk Ahmad Zaini Othman said despite the challenging environment in the retail market, the firm maintained its capability to sustain business growth that had resulted in enhanced revenue and profit levels.

The efforts undertaken to ensure improved asset quality have also borne fruit, with the group's net non-performing loan standing at 3.4% as at March.

(The Star Online / 04 May 2013)

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Malaysia: Filling a Niche for Islamic Banking

KUALA LUMPUR, Malaysia — When Fabiola Nava Carrera told her friends that she was going to pursue a master of business administration degree in Islamic finance at a Malaysian university, they were taken aback.

“I was very interested in going there to see what was going on, because I knew nothing about Asian and Islamic culture,” said Ms. Carrera, a 27-year-old Mexican who had previously worked in international trade. “But my friends in Mexico couldn’t believe that I wanted to go to Malaysia, because they thought that it would be too dangerous or that the culture would be too different.”

Ms. Carrera went anyway. Last year, she was one of four students, three of whom were non-Muslim, who graduated from the inaugural class of the Universiti Tun Abdul Razak’s Global Islamic Finance M.B.A. program in Kuala Lumpur.

Islamic finance differs from conventional banking systems in that usury and speculation are prohibited. Transactions have to comply with Shariah, the legal code of Islam based on the Koran, and are based on principles of risk and profit sharing.

Islamic finance is booming. According to figures from Hong Leong Islamic Bank, a financial institution in Kuala Lumpur, Islamic finance activity has been growing 14 percent per year, with Islamic finance assets exceeding $1.1 trillion in cumulative value in 2011.

Such growth has pushed more educational institutions into creating degree programs in Islamic finance. In 2005, the International Islamic University Malaysia created an Islamic banking institute that offers students Master of Science and doctoral degrees in the subject. In recent years, at least half a dozen business schools in Britain, including the University of East London and Bangor University in Wales, have set up M.B.A. programs in Islamic finance.

Ms. Carrera’s alma mater, also known as Unirazak, is a rare business school located in an Islamic banking hub — according to the school, about a quarter of financial activity in Malaysia is compliant with Islamic law and customs — and yet foreigner-friendly.

“Malaysia is the third largest Islamic market after Saudi Arabia and Iran,” said Geoffrey Alan Williams, Unirazak’s deputy vice chancellor, whose jacket lapel sported a pin of the E.U. flag intertwined with the Malaysian flag. “So if you want to be in Islamic banking, you have to come here, unless you want to be in Tehran.”

Unirazak’s participation in the International Business School Alliance, a network of seven schools, also helps. The alliance, which Unirazak joined in 2011, allows students in member institutions to spend time in two schools and graduate with two M.B.A.’s. After one year in school, two thirds of which were spent in Bremen University of Applied Sciences in Germany and a third at Unirazak, Ms. Carrera graduated with an M.B.A. in logistics and supply chain management from the European school and an M.B.A. in Islamic finance from the Malaysian institution.

The other universities in the alliance are the University of Valencia in Spain, the University of Hertfordshire in Britain, Novancia Business School in Paris, the Institute of Business Studies in Moscow and the University of North Carolina Wilmington.

Each alliance member specializes in a particular area of finance and only students enrolled in their university’s specialty program can attend classes at sister schools. While Unirazak also offers more conventional M.B.A. programs, students there do not have access to I.B.S.A. resources.

“Our partners were initially quite skeptical because they thought” an Islamic finance program would be risky, said Barjoyai Bardai, the program’s director. “But global Islamic finance is trendy and will make an impact. A year on, I think we all feel we made the right choice.”

Unirazak has had to engage a wide range of faculty members to teach the course, with a specialized lecturer for each module. Apart from trained accountants like Dr. Barjoyai, the school has brought in a Shariah scholar from Egypt.

Most students, even practicing Muslims, are unfamiliar with the basic concepts of Islamic finance.

So classes are especially vigorous, since the school needs to impart very specialized knowledge in a limited time.

For a typical module in Islamic products and services, for example, students will have 14 four-hour lectures. The classes are aimed at both familiarizing them with the history of Islamic banking products, and encouraging them to think about developing more contemporary services. Apart from lectures, students are also expected to work on their own project papers.

“It would have been easier to get an M.B.A. in something else,” said Azrina Muhammad Aznan, a 28-year-old Malaysian enrolled in the program. “Other students have time to go to parties, but I have to sit down and do work.”

“If you are trained in Islamic banking, you should also be able to do conventional banking,” said Raja Teh Maimunah, the chief executive officer at Hong Leong Islamic Bank, who recently gave a talk to Islamic finance students at Unirazak.

The global Islamic finance master’s degree at Unirazak costs students more than 61,460 Malaysian ringgit, or nearly $20,000. At 29,020 ringgit, the master’s degree in leadership that Unirazak also offers costs less than half as much.

Dr. Williams, the university administrator, said the reason for the discrepancy was the standardization of prices for all programs under the I.B.S.A. aegis.

Because Islamic finance master’s degree programs were developed quite recently, it is difficult to assess how successful their graduates are.

“It must be relatively new, because I don’t see many of them,” said Ms. Maimunah, the banker. “I can see the benefits of regular conventional bankers going through certification programs that help them understand Islamic jurisprudence. I don’t know whether someone with an Islamic M.B.A. can give me something different.”

She cited programs like those offered by the International Center for Education in Islamic Finance, or Inceif, an organization established by the Malaysian central bank, as ones that were particularly valued in the industry.

Noting that Unirazak collaborates regularly with Inceif, Dr. Williams insisted that such programs were complementary with his school’s degrees.

“The whole industry is exploding in size, so we’re not fighting with other people,” he said, adding that Unirazak was preparing to roll out graduate degrees in Islamic branding and halal management in 2014. “There is so much demand, we just need to find out the right type of courses.

(The New York Times / 26 March 2013)

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Malaysia: Islamic banking on uptrend and continues to grow despite challenges

PETALING JAYA: Challenges or not, Islamic banking is set to continue its growth momentum this year. Underpinning this is the planned conversion of development financial institutions (DFIs) into full-fledged Islamic banks, a growing demand for Islamic finance, a strong sukuk market and anticipated mergers among Islamic banks.

Industry observers and players reckoned that these factors would spur the growth of the industry and hot up competition among the players, both existing and new.

Statistics concur with this. According to the Ministry of Finance (MOF)2012/2013 Economic Report, Islamic banking continued to expand in the first seven months of 2012, with total assets increasing 20.6% to RM469.5bil, representing 24.2% of the country's banking system assets.

As at end-September 2012, Malaysia still dominated the global market with 74% of global sukuk issuance, a Bank Negara report indicated.

Ernst & Young Malaysia director for Islamic Banking Group (Global Financial Services) Muhammad Syarizal Rahim told StarBiz there were several factors that would spur this growth momentum despite the challenges present.

According to him, the game changer in the country's bid to double its share of Islamic banking assets by 2020 and the contributing sustained growth trend in 2013 would be the conversion of DFIs into full-fledged Islamic banking institutions by 2015.

This would, among others, involve the conversion of existing DFI loan and deposit products into Islamic products.

“It is projected that the demand for sukuk instruments will continue to grow, outpacing global supply and providing opportunities for Islamic banks to establish and grow their Islamic fixed income advisory platforms.

“The anticipated consolidation among Islamic banks will also continue, including the creation of a mega Islamic bank. This trend will ensure the continued strengthening of Islamic banks and will be crucial for their planned expansion to be regional players,'' Syarizal noted.

With a total Muslim population of about 60% of the total population, he said there were significant opportunities for the Islamic banking players in the country to increase their market penetration.

He added, however, that there were a number of key challenges for the Islamic banking players in achieving their growth prospects. Although the overall profitability has improved, he felt the operating expenses were still higher for Islamic banks.

The largest operational cost tended to be for human capital, he said, noting that there was also a need to increase technology enablement so services could be delivered more effectively and efficiently. Apart from this, Syarizal said Islamic banks would need to better manage their asset quality, with risk and governance often a complex and sensitive factor in deciding revaluations or disposals.

As for competition, Maybank Islamic Bhd CEO Muzaffar Hisham said the bank welcomed it, as it was confident of its services, corporate philosophy and ability to maintain market leadership. Towards this end, he added that the bank was also committed to improving efficiency and customer satisfaction amidst increasing competition in the market.

“We have successfully expanded our domestic market share in both deposits and financing, 22.9% and 25.9%, respectively, for 2012. Our profit before tax has also recorded a 43.8% year-on-year growth in the first nine months of last year. We are cementing and establishing our domestic leadership in Islamic banking and aggressively pursuing a regional push,'' he noted.

To differentiate itself in the area of Islamic banking, Muzaffar said the bank would continue to strive in providing innovative syariah-compliant solutions for the benefit of its customers. Last year, Maybank Islamic had extended its Premier Mudharabah Account-i to small and medium enterprises, business banking and corporate segments.

He said the bank had also launched the new variable rate of mortgage financing under the concept of Commodity Murabahah. Besides this, it had enhanced the bank's Ikhwan credit card offerings via the Ikhwan Visa Infinite launch.

It had also introduced the M2U Savers-i, an online savings account for the convenience of opening, accessing and closing accounts from anywhere in the world.

Meanwhile, OCBC Al-Amin Bank Bhd director and CEO Syed Abdull Aziz Syed Kechik concurred with Muzaffar, saying that competition in Islamic banking would continue to intensify and was a good thing.

The industry's attractive growth rate across various markets would attract more players, with the healthy competition driving further improvements in the industry.

In terms of differentiation and strategies employed in Islamic banking, he said: “Each player has its own unique value proposition and market strategy. For home-grown firms, the entrenched and well-established position coupled with various home market advantages provides the solid base to grow further.

“For offshore-owned entities, meanwhile, the capability to tap into their international/regional group resources and network provides some degree of advantage in growing the Islamic finance business base across borders.”

(The Star Online / 21 Jan 2013)

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Malaysia: Banking on the ummah

OF MALAYSIA’S claims to fame, leadership in financial services is not an obvious one. Yet in some ways the country is the world’s most important Islamic-finance centre. Just over a fifth of the country’s banking system, by assets, is sharia-compliant; the average for Muslim countries is more like 12%, and often a lot less. Malaysia dominates the global market for sukuk, or Islamic bonds. The country issued the world’s first sovereign sukuk in 2002; in the first three quarters of 2012 it was responsible for almost three-quarters of total global issuance (see chart). Malaysia is also home to the Islamic Financial Services Board, an international standard-setting body.

These are big achievements for a relatively small country of just 30m people, of whom only about 60% are Muslim. In neighbouring Indonesia, which is home to the largest Muslim population in the world, only about 4% of the financial sector is sharia-compliant. Although the much richer Gulf states and Saudi Arabia have bigger Islamic banks, it is Malaysia, argues Iqbal Khan of Dubai’s Fajr Capital investment fund, that is the centre “for thought leadership in Islamic finance”.

How did the country carve out this niche? Malaysia’s Muslim heritage, outward-looking nature and links with financial hubs like Britain and Singapore made the place a natural candidate to bridge the worlds of religion and capitalism. The central bank, the Bank Negara Malaysia, is also supportive.

Two institutions in particular, both set up by the central bank, have contributed to Malaysia’s pre-eminence in the field. The first is the International Centre for Education in Islamic Finance (INCEIF). Established in 2005 and boasting about 2,000 students, INCEIF is the world’s leading university for the study of Islamic finance. The International Sharia Research Academy, housed within INCEIF, brings together scholars to produce an internationally acceptable rule-book for Islamic finance.

The second institution is the Islamic Banking and Finance Institute of Malaysia (IBFIM). It concentrates on vocational training, offering a variety of certificates in Islamic finance. IBFIM also acts as a consultancy to banks and firms that want to become sharia-compliant.

Zeti Akhtar Aziz, the head of the central bank, says that these bodies are the “pipeline to provide the banks with talent”. And not just in Malaysia. There are currently students from 80 countries at INCEIF; and IBFIM has taught people from Afghanistan, Nigeria, Palestine and elsewhere.

All of which gives Malaysia greater status within the ummah, the global Islamic community, important to a country that often feels on the periphery of the Muslim world. There are more tangible benefits, too. The Islamic subsidiary of Maybank, a big local lender, already accounts for about half of the group’s customers and is expanding abroad: it set up a subsidiary in Singapore 18 months ago and has also moved into Indonesia.

Ms Zeti argues that sharia-compliant banks are inherently more stable than conventional peers. Speculation is forbidden, and because charging interest is prohibited under sharia law, returns are based on profit-sharing. Perhaps. Islamic finance is hardly foolproof: Dubai’s debt crisis in 2009 showed that sukuk can help to inflate debt to unsustainable levels. But whatever its pros and cons, Malaysia will provide much of the evidence either way.

(The Economist / 05 Jan 2013)

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Islamic banking and finance to continue growth in 2013

KUALA LUMPUR: Islamic banking and finance is likely to continue its growth trajectory next year despite the outlook of a challenging year ahead and the slowdown in global economy.

The robust achievement recorded throughout the year coupled with the “safe-haven investment” sentiment among investors will be the main reasons for the industry to remain favourable.

In the Economic Report 2012/2013 by the Ministry of Finance, the Islamic banking business was stated to have continued to expand in the first seven months of this year with total assets increasing 20.6% to RM469.5 billion, representing 24.2% of the country’s banking system’s assets.

In 2011, it expanded by 24.1% to RM436.1 billion, reflecting 23.7% of the total banking system assets.

RHB Islamic Bank Bhd Managing Director Abdul Rani Lebai Jaafar said Islamic finance in Malaysia was ready to move on to the next stage and compete more aggressively in the global financial market.

He said Islamic finance seemed to have been also equally accepted by both Muslims and non-Muslims due to continuous awareness programmes and customer experience.

He, however, said 2013 could be a challenging year as the issue of “funding versus financing” has remained within the industry where the question of sourcing for funds to generate financing from very limited resources locally needs to be addressed.

Among the challenges will be the limited number of trained and knowledgeable Islamic bankers available in the market to cater for the growing segment.

Although several Islamic banking learning centres such as Islamic Banking and Finance Institute Malaysia (IBFIM) and International Center for Education in Islamic Finance (INCEIF), have been set up by the authorities and training programmes held for fresh graduates by the industry players to tackle the problem, more concerted efforts are needed, Abdul Rani said.

INCEIF Chair of Islamic Finance Prof Dr Abbas Mirakhor said the authorities must have a strong commitment in a way that appeals to a pluralistic society to ensure progress for Islamic finance.

“It must be framed, communicated and explained to the society in a way that all segments of the society will understand its benefits and no segment is threatened by either the commitment or the progress,” he said, adding that innovation in products would be also important.

“Malaysia is seen to be in the driver’s seat when it comes to Islamic Banking. Innovation is a key factor to push Islamic banking to a higher level.”

New framework

Meanwhile, the new legal framework for Islamic banking and takaful, which is now at the final stages of the enactment process, would be one of the key drivers for the industry movement.

Bank Negara Governor Dr Zeti Akhtar Aziz (photo) said the new law, which will be effective next year, would bring certainty to the legal and regulatory treatment of Islamic financial transactions by providing legal recognition to the contractual requirements in accordance with the Syariah.

“This provides a comprehensive legal environment under which effective risk and profit sharing activities can take place, encompassing all aspects of Islamic financial transactions,” she had said at the Islamic Development Bank Regional Lecture Series on Islamic Economics, Finance and Banking in Jakarta recently.

Abdul Rani said if the new act takes effect next year, the outcome would further drive the Islamic finance into greater stability in the midst of continued innovations and globalisation of Islamic finance.

“The new act would potentially provide the industry greater legal certainties in conducting business given Islamic finance development has extended beyond borders; and has interlinkages with various segments of the financial market and real economy.”

On sukuk, RAM Rating Services Bhd Head of the Islamic Finance Ratings Zakariya Othman said Malaysia has built a successful track record as a hub for Islamic finance transactions given its strong legal and regulatory framework that provides a sound foundation.

This coupled with an increased demand for sukuk from investors has spurred the growth of the Malaysian sukuk market.

“Malaysia still dominates the market with a share of 74 per cent of global sukuk issuance as at end-September 2012 and the trend looks set to continue moving forward.

“The significant demand for sukuk has been spurred by the high levels of surplus savings and reserves in Asia, which will further boost the prospects of the burgeoning sukuk market in Malaysia,” Zakariya Othman said.

On the global outlook, Zeti said the vibrant private sector investment, coupled with ongoing government projects will support the growth of sukuk next year.

“We expect the sukuk market to continue to remain on its growth trajectory.”

Sukuk issuances in Malaysia amounted to RM219.4 billion during the first eight months of 2012 against RM120.7 billion in the corresponding period of 2011, contributed in part by the largest issuance to date of RM30.6 billion by Projek Lebuhraya Usahasama Bhd.

(F M T News / 27 Dec 2012)

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Malaysia: New legal framework for Islamic banking, takaful being enacted

JOHOR BAHARU: The new legal framework for Islamic banking and takaful is currently undergoing the legislative process towards its enactment, Bank Negara Malaysia Governor Tan Sri Dr Zeti Akhtar Aziz said.

She said the new legal framework would not only streamline the legal requirements across sectors but would also ensure that the law was reflective of the nature and features of Shariah contracts.

It would also ensure that the degree of regulation would commensurate with level of risks that Islamic financial institutions, markets and products pose to the overall financial sytem, Zeti said.

"The greater clarity on the legal and prudential requirements underpinned by Shariah principles will enable participants of the Islamic financial system to align to their practices and expectations accordingly when undertaking Islamic financial business and transactions," she said.

She was delivering her keynote address at the last day of the Eighth World Islamic Economic Forum (WIEF) here.

Zeti said while Islamic finance practitioners and scholars continued to draw from the source of fiqh muamalat to create new and innovative instruments, the legal framework needed to be further strengthened to ensure alignment with new market developments.

This is to ensure that it continued to lend certainty and predictability to innovative products and financial transactions, she said.

(The Star Online / 06 Dec 2012)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Malaysia continues to lead in Islamic banking development

KUALA LUMPUR (Nov 19, 2012): Malaysia will continue to be the global leader in developing and promoting Islamic banking systems, according to Roland Berger Strategy Consultants.

Its senior partner for Southeast Asia, Markus Bohme said Malaysia will face competition from member countries of the Gulf Cooperation Council (GCC).

He said there will be an automatic connection with the GCC countries and at the same time competition, but Malaysia is probably set for that in Asia.

"Many people are thinking about Malaysia as a product of Islamic investment banking, automatically the activity will be related to the Gulf region.

"It probably goes beyond the Islamic...Malaysia has relatively strong banks and very international banks which are Maybank and CIMB," he told the media during an Investment Banking Outlook briefing, here today.

However, Bohme said the global investment banking revenues were set to increase this year but more restructuring and consolidation schemes were expected.

He said global investment banking revenues were expected to grow by 10% this year but might post a low double-digit industry return-on-equity (ROE).

"Global investment banks have improved their performances over the past few months, but structural earnings problems persist," he said.

Despite the rebound in revenues and profitability as compared with 2011, he said there would be more restructuring, consolidating and a continued shift into emerging markets, beyond just the traditional financial hubs in Asia.

"Thus, around 40,000 investment banking jobs are expected to be cut in the next two years -- compared with the middle of 2011," he said.

(The Sun Daily / 19 Nov 2012)

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Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Islamic banking provides better value propositions to consumers – KFH Malaysia

KUCHING: Kuwait Finance House (Malaysia) Bhd (KFH Malaysia), a pioneering bank that was incorporated in 1975 in accordance with Islamic principles of syariah, is calling for better awareness among customers that Islamic banking is not only an alternative financial approach but also in some aspects provides better value propositions to the consumers.

In an exclusive interview with The Borneo Post, the bank’s chief executive officer (CEO) Datuk Jamelah Jamaluddin pointed out that Malaysia’s Islamic finance industry had been in existence for over 30 years.

“The enactment of the Islamic Banking Act 1983 enabled the country’s first Islamic bank to be established and thereafter, with the liberalisation of the Islamic financial system, more Islamic financial institutions have been established.

“There are over 300 Islamic financial institutions worldwide across 75 countries. According to the Asian Banker Research Group, the world’s 100 largest Islamic banks have set an annual asset growth rate of 26.7 per cent and the global Islamic finance industry is experiencing average growth of 15 to 20 per cent annually.

“Rapid liberalisation in the Islamic finance industry and facilitative business environment has encouraged foreign financial institutions to make Malaysia their destination of choice to conduct Islamic banking business.

“This has created a diverse and growing community of local and international financial institutions. Full-fledged Islamic banks are given permission to conduct both ringgit and non-ringgit businesses,” Jamelah said.

When asked about the growth of clientele base in the country, she said that so far, the growth in Islamic banking had come from customers switching to Islamic banking from the conventional banking space.

Muslims as well as non-Muslims were starting to see the benefits of Islamic banking and explore syariah-compliant products and services, she remarked.

On the key principle differences between conventional or traditional banking and Islamic banking, the CEO pointed out that Islamic banking differed from conventional banking as it emphasised partnership while prohibiting ‘riba’ or interest.

“Islamic banking aims to create business activities that generate fair and equitable profit from transactions that are backed by real assets.

“It also serves the community at large by promoting ethical investment and by being responsible with a customer’s money right from its source to where it is channeled,” she elaborated.

Nonetheless, the Islamic banking sector was not without challenges as she noted, “Despite the growth, there still is a lack of understanding on the concept, potential customers and benefits of Islamic banking.

“There is also a lack of uniformity between syariah views due to the divergences of opinions between the different schools of law and methodologies that may be called upon when elaborating on the law.

“Syariah interpretation also has to consider business practicability/financing commercial viability,” she emphasised.

Jamelah highlighted that in terms of infrastructure financing, KFH Malaysia had became the main financier in the development project of Islamic religious schools in the state of Johor July 2011.

“The Islamic financing, through a Murabahah Tawarruq facility of up to RM160 million, has been provided to MysysNet Development Sdn Bhd, the company appointed by the Johor state government to undertake the project.

“KFH Malaysia financing will be utilised towards the construction of 97 Islamic religious schools from Phase One to Phase Four,” she stated.

With regards to the attractiveness of KFH’s banking products, the CEO cited an example in saying an increasing number of customers had been interested in KFH Gold Account-i, Muslims and non-Muslims alike.

“Since KFH Account-i was introduced in February 2010, close to10,000 account holders have been recorded. Approximately 30 per cent of KFH Malaysia’s customers are Gold account holders.

“This contributed to around 1.5 tonnes of gold sold. KFH Malaysia also recently launched the first Islamic Junior Gold Account-i for customers below 18 years old. The initial deposit can be as low as five grammes. 

(Berneo Post Online / 27 Oct 2012)

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Malaysia: Islamic banking expands in Sabah

The positive assessment of recent progress at Sabah’s state banks underlines the confidence in the potential of its financial services sector, particularly in the area of Islamic finance.

In July, Malaysia-based RAM Ratings reaffirmed the Sabah Credit Corporation’s (SCC’s) ‘AA1’ and ‘P1’ issue ratings, stating that the state financial institution had a stable outlook.

In the previous month, RAM Ratings also assigned long- and short-term issue ratings of ‘AA1’ and ‘P1’ to the Sabah Development Bank (SDB), noting the ‘strategic role’ the financial institution played in supporting the state’s goals.

The positive rating for the SCC came just weeks after it issued three tranches of sukuk, with tenures of five, seven and 10 years, amounting to RM200 million (US$65.38 million).

In August, the SDB also issued three tranches of five, seven and 10-year bonds, with a total size of RM500 million (US$163.44 million).

In May, Vincent Pung, the chief executive officer (CEO) of the SCC, told local media that the first issuance of the corporation’s sukuk programme in December 2011 had strengthened the bank’s funding base, supporting the growth of its sharia-compliant business.

“The SCC’s profitability is an indicator of its success, recording a surplus before tax of RM51.7 million (US$16.89 million) for the financial year 2011.

This was an increase of RM9.3 million (US$3.04 million), or 22 per cent, from the audited surplus before tax of RM42.4 million (US$13.86 million) for the previous financial year,” Pung told The Borneo Post.

The confidence in Sabah’s financial services potential is not limited to state institutions, as a number of major foreign banks are now also moving into the market.

Citing its confidence in the ‘rapid economic growth potential of the state’, Standard Chartered Bank opened its first shariah compliant branch in Sabah in February under the name Standard Chartered Saadiq.

It also launched a financial literacy programme called ‘Minda Wang’.

“Islamic banking has been growing twice as fast as conventional banking, owing to the rising customer demand, increasing sophistication of Islamic banking offerings and strong government support.

“The new branch, alongside the activation of Minda Wang, furthers our ongoing strategy to support this growth, while expanding our Islamic banking footprint in East Malaysia and throughout the nation,” said Osman Morad, the managing director and CEO at Standard Chartered Bank Malaysia, at the bank’s opening.

In October 2011, Saudi Arabia’s Al Rajhi Bank – the world’s largest Islamic bank – also opened a branch with an eye on the potential raised by the Sabah Development Corridor initiative, which was estimated to have seen some RM107 billion (US$34.98 billion) in investment since it started four years ago.

Like its state-run and private sector counterparts, Al Rajhi Bank had said it would take aim at providing a wider range of financial services for small and medium-sized enterprises (SMEs), which were expected to become a major engine of economic growth.

In May, SME Corporation Malaysia approved grants and loans totalling RM110.7 million (US$36.19 million) to help SMEs, while in August, talks were held in Sabah as part of an initiative to engage SMEs, business organisations and banks.

Officials told local media that the dialogue would introduce a spectrum of financing options available for SMEs under a nationwide SME masterplan.

The focus on encouraging a symbiotic relationship between small businesses and financial services firms to encourage growth was also apparent in the state’s establishment in February of an SME village.

Under plans for Malaysia to achieve high-income nation status, Sabah is projected to have a per-capita income of around RM32,400 (US$10,591) and achieve a gross national income of RM110 billion (US$35.96 billion) by 2020.

As part of the initiative, SMEs’ contribution to nationwide gross domestic product (GDP) is expected to grow from 33 per cent in 2011 to 40 per cent by 2020.

(Berneo Post Online / 07 Oct 2012)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com